IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/12476.html
   My bibliography  Save this paper

House Price Beliefs And Mortgage Leverage Choice

Author

Listed:
  • Bailey, Michael
  • D�vila, Eduardo
  • Kuchler, Theresa
  • Str�bel, Johannes

Abstract

We study the relationship between homebuyers' beliefs about future house price changes and their mortgage leverage choices. From a theoretical perspective, whether more pessimistic homebuyers choose more or less leverage is ambiguous and depends on their willingness to reduce the size of their housing investment. When households primarily maximize the levered return of their property investment, more pessimistic homebuyers reduce their leverage to purchase smaller houses. On the other hand, when considerations such as family size pin down the desired property size, pessimistic homebuyers reduce their financial exposure to the housing market by making smaller downpayments to buy similarly-sized homes. To determine which scenario better describes the data, we empirically investigate the cross-sectional relationship between beliefs and leverage choices in the U.S. housing market. Our data combine mortgage financing information and a housing market expectations survey with anonymized social network data from Facebook. The survey shows that an individual's belief distribution about future house price changes is affected by the recent house price experiences of her geographically distant friends, allowing us to use these experiences as quasi-exogenous shifters of individuals' house price beliefs. We find that more pessimistic homebuyers make smaller downpayments and choose higher leverage, in particular in states where default costs are relatively low, as well as during periods when house prices are expected to fall on average. Overall, our results provide evidence for an important role of heterogeneous beliefs in explaining individuals' financial decision-making.

Suggested Citation

  • Bailey, Michael & D�vila, Eduardo & Kuchler, Theresa & Str�bel, Johannes, 2017. "House Price Beliefs And Mortgage Leverage Choice," CEPR Discussion Papers 12476, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12476
    as

    Download full text from publisher

    File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12476
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Foote, Christopher L. & Loewenstein, Lara & Willen, Paul S., 2016. "Cross-sectional patterns of mortgage debt during the housing boom: evidence and implications," Working Papers 16-12, Federal Reserve Bank of Boston.
    2. Stephanie Johnson & John Mondragon & Anthony DeFusco, 2017. "Regulating Household Leverage," 2017 Meeting Papers 327, Society for Economic Dynamics.
    3. Ana Fostel & John Geanakoplos, 2012. "Tranching, CDS, and Asset Prices: How Financial Innovation Can Cause Bubbles and Crashes," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(1), pages 190-225, January.
    4. Atif Mian & Amir Sufi, 2009. "The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis," The Quarterly Journal of Economics, Oxford University Press, vol. 124(4), pages 1449-1496.
    5. Bulow, Jeremy & Rogoff, Kenneth, 1989. "A Constant Recontracting Model of Sovereign Debt," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 155-178, February.
    6. Floetotto, Max & Kirker, Michael & Stroebel, Johannes, 2016. "Government intervention in the housing market: Who wins, who loses?," Journal of Monetary Economics, Elsevier, vol. 80(C), pages 106-123.
    7. Ulrike Malmendier & Stefan Nagel, 2011. "Depression Babies: Do Macroeconomic Experiences Affect Risk Taking?," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 373-416.
    8. Andra C. Ghent & Marianna Kudlyak, 2011. "Recourse and Residential Mortgage Default: Evidence from US States 1," Review of Financial Studies, Society for Financial Studies, vol. 24(9), pages 3139-3186.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Goldfayn-Frank, Olga & Wohlfart, Johannes, 2018. "How do consumers adapt to a new environment in their economic forecasting? Evidence from the German reunification," IMFS Working Paper Series 129, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    2. Bailey, Michael & Johnston, Drew & Kuchler, Theresa & Ströbel, Johannes & Wong, Arlene, 2019. "Peer Effects in Product Adoption," CEPR Discussion Papers 13731, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    disagreement; heterogeneous beliefs; leverage; Mortgage Choice;

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:12476. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.